Botswana on the path of fallout from US-China trade war

As the trade war between the US and China intensifies, Botswana’s billions are at increased risk. And if the economic brinkmanship between the world’s largest markets is not halted, BPOPF’s already dented P65billion and Debswana Pension Fund’s P7billion that are exposed to further erosion that could take in Botswana’s diamond and tourism sectors in its sweep. KEABETSWE NEWEL reports.

The escalating trade war between two of the world’s superpowers, China and the United States of America, places highly at risk billions of pula in Botswana investments in the United States, the Botswana Gazette has established.

The war could also reduce demand in the two leading consumers of Botswana’s exports, crippling foreign earnings that could reverse continued fallout from the 2008 economic recession.

Escalating tensions between the US and China have piled pressure on US stocks which continue to decline, reducing the value of investment in the stocks. Head of Research at Motswedi Securities, Garry Juma, says Botswana money in pension funds and foreign reserves invested in US stocks will obviously see a decline in value (if there is no halting or at least de-escalation in the trade war).

Botswana is heavily invested in the US stock market through foreign reserves held by the Bank of Botswana (BoB) and pension funds, especially the Botswana Public Officers Pension Fund (BPOPF) and Debswana Pension Funds (DPF). BPOPF’s Principal Officer Boitumelo Molefhe, says the fund has investments in the US through 17 offshore fund managers but will not reveal their names or the value of the funds mandated to them. BPOPF, however, has over P65 billion in Assets Under Management (AUM), 65 percent of it offshore, mostly in the US. This means that over P35 billion belonging to BPOPF could lose value because of the declining US stocks.

Debswana Pension Fund has over P7 billion in AUM 35 percent of which is invested offshore, also especially in the US. DPF CEO Gosego January said the Fund has exposure to both US and China equity markets. She said DPF will be affected by the US-Sino trade wars in the event that the underlying stocks in the different portfolios are affected. “The portfolio will experience increased volatility with upward and downward swings in the Fund’s portfolio. The diversification across asset classes and investment managers will assist in mitigating the impact of trade wars. Supportive monetary policy by central banks, fiscal policy support by affected countries and resilient company portfolios across different managers will offset some of the risks emanating from the trade wards,” she said. At BPOPF, Molefhe continued: “Even without the trade war, there are other market forces that keep us on our toes to rebalance the portfolio to ensure that they do not erode the value of the portfolio.”

According to the 2018 Bank of Botswana annual report, pension funds’ assets declined by 3.7 percent from P82 billion in 2017 to P79 billion in 2018 , shedding a cool P3 billion, which BoB said reflected the decrease in investment by BPOPF. “Investment in domestic equities declined by 7.3 percent to P16.5 billion in the 12 months to 2018, while holdings of offshore equities decreased by 8.1 percent to P36.6 billion due to the reduction in prices and unfavourable exchange rates,” BoB revealed.

At the end of December 2018, foreign exchange reserves amounted to P71.4 billion, a decrease of 3.1 percent from P73.7 billion in 2017. This was equivalent to 15 months of imported goods and services. The decrease was because of drawdowns and adverse valuations on equity investments. Kwabena Antwi, investment analyst at local fund management firm Kgori Capital, says the on-going trade dispute between the world’s two largest economies, the US and China, is having ripple effects on most nations, including. Botswana.

Two of Botswana’s largest sectors, mining and tourism, may be impacted by the trade wars. The ongoing spat between the US and China may lead to reduced expectations of global economic growth, which would result in global equity prices tumbling down and in turn the wealth of investors in global markets. Antwi observes: “If consumers in developed nations are uneasy about the future, they could cut back their expenditure on luxury goods in order to preserve (their personal) wealth. This would be a negative development for Botswana as Botswana’s tourism products are considered luxury goods with bed night prices in the thousands of Dollars. Secondly, diamonds are a luxury good and reduced demand would negatively affect diamond prices and production. The net effect of a slowdown in Botswana’s luxury tourism and diamond mining would be a negative knock-on effect on GDP growth.”

Tourism’s contribution to GDP has increased from 13 percent in 2008 to the current levels of 21 percent in 2017 and 19 percent for the first quarter of 2018. A good share of this is thanks to Americans being among the largest consumers of Botswana tourism. Further, China and the US are the largest markets for Botswana diamonds, which are the mainstay of the economy. If the US and China record declines in economic growth, it would impact their citizens’ spend on Botswana’s diamonds and tourism.

The Managing Director (MD) of Barclays Bank of Botswana, Keabetswe Pheko-Moshagane, says emerging markets hoping to bolster their growth through the export-oriented manufacturing model might face greater barriers to entry. “A widespread and protracted trade war would disrupt global demand and weaken commodity prices, a situation that would hurt Botswana and other African economies which are slowly recovering from the effects of the 2014/15 commodity price crunch,” she observes, noting that China is the biggest consumer of base metals like copper, which Botswana exports.

A decline in commodity process thus means Botswana bleeds money. This is because if the Chinese economy slows down, so will China’s capacity to import copper from Botswana.